NBN Co's execution challenge

The new NBN corporate plan paints a far more credible picture but leaves NBN Co with little wriggle room to justify further delays or cost hikes.

The big reveal of the revised NBN corporate plan was yet another illustration of how political grandstanding can often sadly overshadow the core message. While NBN watchers were keen to get a look at the official numbers the launch was actually prefaced by a belligerent display by Communications minister Stephen Conroy.

The minister had obviously been storing his vitriol for quite some time, because when the floodgates opened very few where spared. The media, in general, copped a severe serve for providing the Coalition a platform to “mislead the public” on the NBN. There were no prisoners taken and no apologies made and after dishing out the requisite punishment to the opposition Conroy finally gave way to NBN Co boss Mike Quigley and the revised numbers.

Chipping in some extra cash

So, here’s what we know. The cost of building the NBN has gone up by $1.4 billion to $37.3 billion and it will take an extra six months to get it across the line.

Operating expenditure is set to tick up by $3.2 billion over the life of the project and while the government has rolled out the usual set of reasons for the delays and the cost hikes – the delayed final agreement with Telstra, the HFC deal with Optus - and the fundamental change in the method of the rollout.

NBN Co’s’ decision to pursue the “build-drop” approach, where fibre is delivered straight from the multiport to the home, will cost more but as Quigley pointed out yesterday it’s better to spend the money now to save costs over the long-term.

The move marks a departure for NBN Co from the two-stage “demand drop” build approach tested in a number of second-release sites. Under that approach, NBN Co was bringing the fibre to the street designated and homes were connected once orders for a service were placed by the retail service provider (RSP).

NBN Co now intends to take the fibre from the street to a connection device on premises, this connection will come to life once the user gets in touch with a RSP, at which point the network termination device will be installed by NBN Co.

The “build-drop” approach is expected to help with the take-up rates, especially as the more of Telstra’s copper is taken out of the equation, but it will require NBN Co to conduct more consultation with the public. There is a looming cloud over the horizon over what will transpire once the rollout gets to multi dwelling units, but we will have to wait and see how that potentially complicated process plays out.

The bottom line is that the facts and figures contained in the new plan highlight a fine-tuned balancing act. The near-term cost increases are balanced out by the promise of long-term cost savings. The increase in the amount of government equity is balance by the slight uptick in the rate of return, from seven per cent to 7.1 per cent.

The NBN Co is also sticking with its target to pass 758,000 premises by the end of 2012 and lift the total premises on the high speed network rollout to 3.5 million by mid-2015. This is pretty much what was outlined by NBN Co in March.

The debate over whether the numbers reinforce the Coalition’s argument of continued Labor profligacy or the government’s insistence that the NBN is on track, misses the point really. What’s really important is that both Conroy and Quigley have now made it clear that NBN Co will now have to live or die by this new plan and there’s little room left for further excuses on delays or cost hikes.

For NBN Co, it all boils down to execution and whether it can ramp up the pace of the rollout. The future of the Labor NBN depends on it.

Conroy’s belligerent rant

Of course the opposition is planning to deliver its own NBN but Conroy’s fierce words are unlikely to force the Coalition to provide the nitty-gritty on that just yet. The belligerence on display yesterday is to some extent justified, especially in light of opposition’s line of attack in the lead up to the release of the corporate plan.

However, there was a rather defensive mindset on display as well or why else would Conroy spend so much time taking the media and the opposition to task for misleading the public? Perhaps that time would have been better served in highlighting the enormous potential of this visionary endeavour. It’s a message that Australians are increasingly waking up to and will continue to do so provided the fibre gets to them in time.

The Coalition’s current strategy is a game of diminishing returns and will only go so far when it comes to polarising opinion. However, it is evidently getting under the government’s skin. It doesn’t need to because the Coalition needs to get its house in order as well.

Malcolm Turnbull may have tentatively managed to put a lid on the idea that the Coalition will destroy the NBN but the jury is still out on that. There is ample evidence that many within the Coalition are still not on the same page. The latest example of this can be seen in this episode of ABC Capital Hill and the showdown between WA Liberal MP Don Randall and Labor’s Mike Kelly.

According to Randall, a 12mbps wireless service is more than enough to meet our needs and Telstra’s wireless offensive will somehow derail the NBN Co.

Sooner or later Malcolm Turnbull will have to present more details to the public on how he intends to fund the Coalition NBN and how he intends to deliver Australia’s broadband future given the complex negotiations that will need to be revisited.

As for Labor, it will need to continue to reinforce its efforts to sell its vision to the public and the best way to achieve that is to stay on target.

IMPORTANT: This information is general financial product advice only and you should consider the relevant product disclosure statement (PDS) or seek professional advice before making any investment decision. Product disclosure statements for financial products offered through InvestSMART can be downloaded from this website or obtained by contacting 1300 880 160. You should consider the product disclosure statement before making a decision about a product. All indications of performance returns are historical and cannot be relied upon as an indicator for future performance.